Solar: Big Gets Bigger, Small Suffers

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Doug Young

Yingli logoA couple of new items from the battered solar sector hint that the situation may be improving for the largest companies, even as smaller players continue to struggle and face the very real danger of collapse. Of course I’d be remiss if I didn’t point out that I’ve predicted a rebound for this embattled sector once or twice before based on optimistic company statements, and in each instance the rebound I was sensing never came. This time the difference could be that many smaller players have now closed or are tottering on the brink of insolvency, meaning they are losing share to the larger, relatively healthier players with more resources.

That situation is reflected in the latest news from Yingli Green Energy (NYSE: YGE), one of the sector’s largest and relatively healthy players, which has just announced some preliminary fourth-quarter forecasts that look quite encouraging. (company announcement) Meantime, the smaller, China-listed Chaori Solar (Shenzhen: 002506) sent out the industry’s latest warning signal, with word it may miss an upcoming bond payment. (English article)

Let’s start with Yingli, as it’s one of China’s stronger solar panel makers and was actually earning a profit as recently as the second quarter of last year, even as most other players lost money for most or all of 2012 amid a prolonged global downturn. Yingli’s preliminary announcement appears to show the company’s sliding fortunes may have reached bottom in the third quarter of 2012, as both its sales and margins rebounded strongly in the fourth quarter.

Yingli said its fourth-quarter shipments rose 40 percent from the third quarter, well ahead of its previous guidance for a low teen percentage increase. The 40 percent rise was also much better than the previous 2 quarters, including a third quarter drop of 16.9 percent and a second quarter that saw shipments rise 13.7 percent.

At the same time, Yingli also reported its fourth-quarter gross margins would come in between -8 percent and -8.5 percent, partly due to one-time charges related to excess inventory and idle capacity. While it’s never good to have negative margins, the fourth-quarter forecast was still a notable improvement from the -22.7 percent gross margin for the third quarter.

The company didn’t comment on its profit situation, but it does appear that it will report another loss for the fourth quarter due to the one-time charges. If that’s the case and sales and margins continue to rebound, we could see Yingli emerge as one of the first solar companies to return to profitability in the current quarter.

Shareholders seemed generally encouraged by the preliminary results announcement, bidding up Yingli shares by 2.3 percent after the news came out. A broader rally has seen Yingli’s shares more than double from their lows in late November and early December, as investors bet that sunnier days are ahead for the sector as Beijing prepares a broader bailout plan that is likely to benefit the biggest companies like Yingli.

Meantime, the end of last week saw some mixed signals coming from Chaori, which said it might not be able to make a bond interest payment due on March 7 due to a cash shortage. But then a day later a top company executive said Chaori wouldn’t miss the interest payment after all, thanks to intervention by the local government. (English article) This kind of intervention has become relatively common as local governments try to prevent companies from failing, though this is one of the first times a government has intervened to help a company with its bond payments.

Industry watchers will recall that former sector leader Suntech (NYSE: STP) also faces a much bigger bond-related headache in March, when nearly $600 million worth of its bonds will come due for repayment. Suntech hired UBS in October to help it renegotiate the debt with holders of the bonds, but we haven’t heard any results yet of the negotiations. (previous post) At the end of the day I do expect we’ll see Suntech reach a deal with the bondholders, though if it doesn’t the government could also still come to Suntech’s rescue the way it did with Chaori.

Bottom line: Yingli’s preliminary fourth quarter results show the company may return to profitability in the current quarter, while smaller solar players like Chaori will continue to face a cash shortage.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.


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